What is more advantageous to open – the osek murshe or the hevra ba’am?

What is more advantageous to open – the osek murshe or the hevra ba’am?

Before starting a new business, choosing the legal form of its organization is one of the main problems for a first-time entrepreneur. For larger enterprises in Israel, there are two main forms of doing business – the Osek Murshe (or private entrepreneur) and the Hevra Ba’am (limited liability company). Below you will find out what particular features there are in these forms of operation and which option is best to choose in which situation.

Specific aspects of Osek Murshe

The main distinguishing feature of this form of activity is the obligation to pay the Value Added Tax in accordance with the turnover of the company. In this case, the company has the right to refund the VAT spent on goods and services purchased for business operations.

Specific aspects of Hevra Ba’am

In this case, the taxation system is much more complex and variable and depends on the individual characteristics of the enterprise. The entrepreneur at the same time owns the company, namely, the controlling stake in its shares.

Advantages of Osek Murshe as compared to Hevra Ba’am

Easy registration. It is possible for any first-time entrepreneur to formalize his activities as an osek murshe. Before you start, you just need to register with the national insurance and VAT accounting services and to start a file at the tax office. At the same time, in order to formalize activities as a hevra ba’am, it is necessary to pay for the services of a professional lawyer and in addition to all of the above actions to register the new enterprise in the Rasham ha-Havarot and to open a special account in the bank.

Relative ease of bookkeeping. A private entrepreneur can manage his own bookkeeping (although we strongly do not recommend doing this because of the possibility of making mistakes) and represent his interests in the tax authorities. Also, the osek murshe can choose how to keep books – by simple or double-entry method (some types of osek murshe are obliged to maintain double-entry accounting records). With the hevra baam everything is much more complicated. Here, accounting should be conducted solely by the method of double entry and one cannot do without the services of a professional accountant, regardless of the turnover and size of the company.

Reporting. Esek murshe has the right to file the current (once in one or two months) and the final annual reports to the tax authorities. Yet, to simplify this complex procedure, we still recommend that you seek help from specialists. Hevra Ba’am does not have such an opportunity. To submit an annual report yearly, it is mandatory to conduct a final balance audit, which can only be done by an independent “rohe-heshbon”. Accordingly, he can represent interests in the tax authorities on behalf of the company.

Advantages of Hevra Ba’am as compared to Osek Murshe:

Responsibility. The founder of Osek Murshe bears personal financial responsibility to creditors and for other financial obligations of the company. In the event of unexpected troubles, it’s not so easy to close down the business and avoid debts. At the same time, there is no personal responsibility of the owner of the company to the creditors in the hevra ba’am (except for cases of providing guarantees in this form). In case of a financial trouble, it is enough to go through bankruptcy proceedings.

Variability of the tax structure of the hevra ba’am and the possibility to optimize deductions to the state bodies as much as possible. So, for example, the owner of a controlling stake may monthly pay himself part of the amount in the form of salary and receive the rest in the form of dividends, and thus pay less taxes. At the same time, the tax burden on the osek murshe is not as flexible and the ways to optimize payments are several times less.

Absence of deductions to the national insurance service and of health tax payments for the hevra ba’am. For the osek murshe its rate may be above 17%.

Reputational risks. Reputation of an osek murshe is directly related to the reputation of the entrepreneur as a private person. At the same time, in a hevra ba’am this problem is completely absent and even in the event of a change of ownership there is a simple procedure for selling shares, which in fact has no effect on the company’s activities.

The possibility of a transition from the form of activity as the osek murshe to that of the hevra ba’am. This is a rather complicated process, but in the case of an increased turnover and the expansion of the enterprise, this option exists.

In what situation is it better to open the osek murshe, and when the hevra ba’am?

If the potential income from the activity of the enterprise is planned to be sufficiently large, it is worthwhile to think about opening a hevra ba’am for tax optimization and more efficient accounting. It is also obligatory to register this kind of activity if several people act as the founders of the company. Another case of the desirability of registering the hevra ba’am is the abundance of credit obligations and financial injections from the outside necessary to establish a business. In this case, it is better to be safe and avoid personal financial responsibility.

If you plan to have an enterprise with an average annual turnover, and you will be its sole founder – do not hesitate to register the osek murshe. Also, to think about such a way of doing business will do good to first-time entrepreneurs with a limited startup capital. In this case, you do not have to spend your modest budget to pay for the services of lawyers, and you can immediately put it into business.

In any case, choosing the right type of doing business and registering it is quite a time-consuming task. To avoid mistakes and quickly start your company, it is better to turn for help to professionals. The company “Shmuel Brodetsky Rohe Heshbon” will help you to choose the right form of doing business in accordance with the specifics of your business and quickly register a company with the state institutions.